Post by jeffolie on Sept 12, 2007 15:29:56 GMT -6
"Snowball" is brought to you from demons in derivatives hell
Snowball notes
Us innocent types on FT Alphaville thought a snowball was a slightly naff cocktail, an Advocaat-based drink from the 70s. Either that, or a little white pill popped occasionally on a Saturday night.
But no. This snowball is another, potentially more noxious variety.
The question of what a financial snowball looks like was prompted by this release, a notice of a class action lawsuit filed by Aidikoff, Uhl & Bakhtiari against Morgan Stanley in the US District Court for the Central District of California. The suit is filed on “behalf of all persons who purchased or otherwise acquired “Snowball notes” issued by Bayerische Landesbank and underwritten by Morgan Stanley” between August 30, 2004 and the present.
The significance of which is unclear. In the US they chuck class actions around like confetti so frankly it’s hard to tell.
But snowball notes we find intriguing. The release states:
Snowball notes are complex structured financial products underwritten by Morgan Stanley that have components of straight debt instruments and derivatives combined into one investment structure. Snowball note returns are tied to quarterly fluctuations of the London Interbank Offered Rate (”LIBOR”).
Searching around, information on snowball notes is thin on the ground. But ahead of the curve, of course, was the FT’s Gillian Tett who wrote about the structures back in March.
Using these notes, a company can cut a derivatives deal with a bank that in effect provides virtually free funding for a year or two, thus allowing corporate executives to flatter their accounts or stave off a cash crisis. But if the finance is not quickly repaid and certain trigger points are breached, often linked to market interest rates, funding costs spiral dramatically, says Tett.
A world of ultra-low voltility had prompted the return of high-octane gambits to generate returns, noted Tett, and had seen the return of such high-risk funding antics by companies. With high associated leverage, the structures can be highly sensitive to market volatility, with swings resulting in large losses.
Which makes you wonder how these gambles have played out now volatilty has come out of retirement and returned to the markets. Tett wrote in March:
I would hazard a guess that the actual number of snowball deals in the markets is still relatively small though it is impossible to tell: such deals are apparently being placed, in great secrecy, in private markets and often involve privately held companies, such as the German Mittelstand. Indeed, the bulge-bracket banks often only learn about them as a result of associated hedging.
So we have high leverage, huge sensitivity to volatility, possible corporate exposure and, worst of all, a German angle. How much worse can it get? Oh dear - apparently there’s also something called a thunderball note. But we’re still researching that.
ftalphaville.ft.com/blog/2007/09/12/7232/chemical-finance-snow
Snowball notes
Us innocent types on FT Alphaville thought a snowball was a slightly naff cocktail, an Advocaat-based drink from the 70s. Either that, or a little white pill popped occasionally on a Saturday night.
But no. This snowball is another, potentially more noxious variety.
The question of what a financial snowball looks like was prompted by this release, a notice of a class action lawsuit filed by Aidikoff, Uhl & Bakhtiari against Morgan Stanley in the US District Court for the Central District of California. The suit is filed on “behalf of all persons who purchased or otherwise acquired “Snowball notes” issued by Bayerische Landesbank and underwritten by Morgan Stanley” between August 30, 2004 and the present.
The significance of which is unclear. In the US they chuck class actions around like confetti so frankly it’s hard to tell.
But snowball notes we find intriguing. The release states:
Snowball notes are complex structured financial products underwritten by Morgan Stanley that have components of straight debt instruments and derivatives combined into one investment structure. Snowball note returns are tied to quarterly fluctuations of the London Interbank Offered Rate (”LIBOR”).
Searching around, information on snowball notes is thin on the ground. But ahead of the curve, of course, was the FT’s Gillian Tett who wrote about the structures back in March.
Using these notes, a company can cut a derivatives deal with a bank that in effect provides virtually free funding for a year or two, thus allowing corporate executives to flatter their accounts or stave off a cash crisis. But if the finance is not quickly repaid and certain trigger points are breached, often linked to market interest rates, funding costs spiral dramatically, says Tett.
A world of ultra-low voltility had prompted the return of high-octane gambits to generate returns, noted Tett, and had seen the return of such high-risk funding antics by companies. With high associated leverage, the structures can be highly sensitive to market volatility, with swings resulting in large losses.
Which makes you wonder how these gambles have played out now volatilty has come out of retirement and returned to the markets. Tett wrote in March:
I would hazard a guess that the actual number of snowball deals in the markets is still relatively small though it is impossible to tell: such deals are apparently being placed, in great secrecy, in private markets and often involve privately held companies, such as the German Mittelstand. Indeed, the bulge-bracket banks often only learn about them as a result of associated hedging.
So we have high leverage, huge sensitivity to volatility, possible corporate exposure and, worst of all, a German angle. How much worse can it get? Oh dear - apparently there’s also something called a thunderball note. But we’re still researching that.
ftalphaville.ft.com/blog/2007/09/12/7232/chemical-finance-snow